Racial Differences in Patterns of Small Business Finance: The Importance of Local Geography,” Business Access to Capital and Credit

This paper examines the question of whether considerations of a small business’ local geography—defined as the area where the small business is located—have been inappropriately omitted from previous analyses of differences in the credit market experiences of White-owned and minority-owned firms. We consider two types of local geographic characteristics: (1) economic variables that may influence firm risk and (2) other variables that may influence lender decisions. The analysis uses the 1993 National Survey of Small Business Finances (NSSBF) and detailed addi-tional data on the demographic and economic characteristics of the local area where each small business surveyed by the NSSBF is located. After controlling for a vari-ety of loan, firm, owner, and local market characteristics, we find no statistically significant differences in approval rates between White-owned firms and firms owned by Asians, Hispanics, or women. The only racial disparity that is statisti-cally significant is the difference in approval rates between White-owned and Black-owned firms. Importantly, our results show that the economic and demographic characteristics of a firm’s local geography should be considered if a more accurate quantification of these racial disparities and understanding of their underlying sources is desired